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Some risks are diversifiable because they are specific to individual assets or sectors and can be mitigated by holding a diversified portfolio, which spreads exposure across various investments. For example, company-specific risks, such as poor management decisions, can be offset by investing in multiple companies. In contrast, systematic risks, like economic downturns or market-wide phenomena, affect all investments and cannot be eliminated through diversification. These systemic risks require different strategies, such as hedging or asset allocation, to manage effectively.
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What does residual risk mean in the RM process army?
Residual risk in the Army's risk management (RM) process refers to the level of risk that remains after all identified risks have been assessed and mitigated through control measures. It acknowledges that, despite efforts to reduce risk, some level of uncertainty or potential for loss may still exist. This remaining risk must be accepted or further managed by leaders based on the mission's objectives and available resources. Understanding residual risk is crucial for informed decision-making and ensuring mission success while maintaining safety.
What is a systematic risk?
Systematic risk, also known as market risk, refers to the potential for loss in an investment due to factors that affect the entire market or economy, such as economic downturns, interest rate changes, or geopolitical events. Unlike unsystematic risk, which is specific to a particular company or industry, systematic risk is unavoidable and impacts all investments to some degree. Investors often use diversification to mitigate unsystematic risk, but systematic risk cannot be eliminated through diversification alone. It is typically measured by beta, which indicates how much an asset's price moves relative to market movements.
What is risk aggregation?
AGGREGATION OF RISKS There has been much discussion of the RAROC and VaR methodologies as an approach to capture total risk management. Yet, frequently, the risk decision is separated from risk analysis. If aggregate risk is to be controlled, this or a similar methodology needs to be integrated more broadly and more deeply into the banking firm. Both aggregate risk methodologies presume that the time dimensions of all risks can be viewed as equivalent. A trading risk is similar to a credit risk, for example. This appears problematic when market prices are not readily available for some assets and the time dimensions of different risks are dissimilar. Yet, thus far no one firm has tried to address this issue adequately.
What is the portion of total risk that remains after unacceptable risk has been determined?
The portion of total risk that remains after unacceptable risk has been determined is referred to as acceptable risk. Acceptable risk encompasses the level of risk that an organization or individual is willing to tolerate, given the potential benefits and the cost of mitigation measures. This remaining risk is typically managed through various strategies, including risk transfer, risk reduction, or acceptance, depending on the specific context and risk appetite. Ultimately, acceptable risk represents the residual risk that is deemed manageable and justifiable.
What is the intersection ofthe assessed probability and severity of a hazard called in the crm process?
It is risk assessment.It is risk assessment.It is risk assessment.It is risk assessment.
What is the difference between diversifiable risk and non-diversifiable risk?
Investment risk that can be reduced or eliminated by combining several diverse investments in a portfolio. Non-market (non-systemic) risks are diversifiable risks.
What is another term for market risk?
another term for market risk is non-diversifiable risk.
Strikes lawsuits regulatory actions and increased competition are all examples of?
diversifiable risk
Why are investors not compensated for diversifiable risk?
Investors are not compensated for diversifiable risk because it can be eliminated through diversification. This type of risk, also known as unsystematic risk, is specific to individual assets or companies and does not impact the overall market. Since investors can reduce their exposure to this risk by holding a well-diversified portfolio, they do not require an additional return as compensation. In contrast, systematic risk, which affects the entire market, is what investors are compensated for through higher expected returns.
What is the difference between has the risk or takes the risk?
one has the word has in and one has the word takes in Diversifiable risk is the risk which can be mitigated by investing in different companies, different sectors, different assets and also different regions. Here we trying to minimize the risk of huge loss by taking the whole risk against one or few companies/ sectors / assets / regions. Non-Diversifiable risk can not be mitigated at all. This is the risk you are exposed to in individual investment. Every investment holds Market risk, i.e. uncertainity of market moving up or down and respective movement of your investment .
How many diverse securities are required to eliminate the majority of the diversifiable risk from a portfolio?
recent research has found it would be 50 to 60 stocks .
What is the relevant portion of an assets risk attributable to market factors that affect all firms called?
a. Unsystematic riskb. Diversifiable riskc. Undiversifiable riskd. None of the aboveD. NONE OF THE ABOVE
How interpret the market risk of a security?
a security's risk is divided into systematic (Market risk) and Unsystematic risk (Diversifiable risk), the market risk is the risk inherent to the security, it is attributed to macro economic factors such as inflation, war etc. and affects all securities in the market and so cannot be diversified away. Market risk of a security is measured and reflected by the Beta coefficientwhich is an index that measures the security's volatility to market movements i.e. how much the returns of the security will vary if their changes in the market
What information does beta give to a financial manager?
Beta is also referred to as financial elasticity or correlated relative volatility, and can be referred to as a measure of the asset's sensitivity of the asset's returns to market returns, its non-diversifiable risk, its systematic risk or market risk. On an individual asset level, measuring beta can give clues to volatility and liquidity in the marketplace. On a portfolio level, measuring beta is thought to separate a manager's skill from his or her willingness to take risk.
What is the difference between SML and CML?
Differences between CML and SML· Capital market line measures risk by standard deviation, or total risk· Security market line measures risk by beta to find the security's risk contribution to portfolio M· CML graphs only defines efficient portfolios· SML graphs efficient and nonefficient portfolios· CML eliminates diversifiable risk for portfolios· SML includes all portfolios that lie on or below the CML, but only as a part of M, and the relevant risk is the security's contribution to M's risk· Firm specific risk is irrelevant to each, but for different reasons
What does residual risk mean in the CRM process?
A residual risk is the remains of a risk on which a response has been performed. As part of CRM, you are managing some risk, for which you will have some risk response or strategy. A residual risk is the reminder of the risk that remains after you have implemented a risk response.
What are some of the different market risks?
There are many different market risks. Some different market risks are systematic risk, credit risk, country risk, political risk, market risk, interest rate risk and many more.
